Question

. XL Co. owns a machine purchased a machine 4 years ago for OMR 80,000. The accumulated depreciation on the machine to date is OMR 32,000. Depreciation rate is 10% per annum straight line method. XL Co. can sell the machine to another manufacturer for OMR 50,000. In order to make the sale, XL Co. must incur a transportation cost of OMR 2000. If XL Co. replaces the machine with a new version, it would cost OMR120,000. The cash flows from existing machine are estimated to be OMR 25,000 for the first two years and OMR 20,000 for the remaining 4 years of the machine’s life. The discount rate at 10 % is: - Year -1 0.909, Year -2 0.826, Years- 3 to 6 inclusive 2.619 (annuity rate) Calculate the value of machine under the four methods identified in the four possible measurement bases with clear steps and calculations .

Answer 1

Answer:

Asset valuation using Historical cost method

Value of the asset = Acquisition cost- Accumulated depreciation

= 80000-32000= 48000

Asset valuation using Current cost method

Value of the asset = Current market value of the asset- Accumulated depreciation

= 120000- 32000= 88000

Asset valuation using realizable value method

Value of the asset = Realizable value- cost of sale

= 50000-2000= 48000

Asset valuation using Present value method

Value of asset = present value of future cash flows

PV of 1st-year cash inflow= 25000 x 0.909= 22725

PV of 2nd year cash inflow = 25000 x .826= 20650

PV of 3-6 years cash inflows= 2.619 x 20000= 52380

value of the asset = 52380+20650+22725= 95755